Pensions Select Committee pinpoints auto-enrolment risks

The Work and Pensions Select Committee has published a report highlighting the growing disquiet over the resilience of a number of master trust auto-enrolment pension schemes.

The Committee also backed Federation Small Businesses (FSB) calls to do more to support pension saving among the 4.2 million self-employed people not covered by auto-enrolment – many of whom won’t be able to take advantage of the new Lifetime ISA (LISA).

While the Committee praises the success of the roll out of auto-enrolment to date, it warns of the dangers posed by potentially unstable master trust schemes to savers and small businesses.

FSB has previously expressed concerns over the emergence of these schemes on the market and the lack of clarity over the liabilities small business owners face if their chosen scheme were to underperform or collapse.

Gordon Millward, FSB regional chairman, said: “Over the next two years more than a million small and micro businesses will be setting up a workplace pension in order to comply with auto-enrolment. These smaller employers are not pension experts. They need to know that when they set up a pension scheme for their employees, the money is safe, well looked after and will deliver value for money in retirement.

“If there is any question mark over the quality or resilience of certain master trust schemes, it is important that the Pensions Regulator has all the necessary powers to investigate and take effective action.

“I would encourage small business owners to be prudent when making their choice of pension scheme and, if necessary, seek assistance from trusted third parties before committing to a particular provider. Our research shows the top three sources of information and support businesses expect to turn to when introducing a workplace pension are their accountants (56 per cent), FSB (37 per cent) and the Pension Regulator website (33 per cent).”

The committee also recommends that the Government does more to facilitate retirement saving among the self-employed. A recent FSB report found that less than a third (31 per cent) of self-employed people are saving into a private pension, with 15 per cent suggesting they do not have retirement savings of any kind.

A quarter (27 per cent) plan to rely on their business to fund their retirement, although with many self-employed individuals earning a low income this is unlikely to be a viable solution for all. FSB is urging ministers to work towards a savings solution for the self-employed. While the Lifetime ISA will be an attractive savings proposition for many, it will only be available to those under the age of 40.

With over 80 per cent of the growth in self-employment since 2004 among those aged 45 and above, more needs to be done to support the the self-employed to save for the future.

The Committee backs a recommendation from FSB’s recent report ‘Going it alone, moving on up: Supporting self-employment in the UK’ to use the self-assessment tax return to prompt self-employed individuals to save into a private pension. FSB is also calling on the Government to work with the pensions industry to design more flexible savings products, which allow flexible drawdown to cover temporary gaps in earnings as well as helping them to build sufficient retirement earnings.

Mr Millward added: “In a whole range of areas, the self-employed are akin to round pegs in a system built of square holes. This is equally true in the area of pensions, with many self-employed people, particularly those on low-incomes, left out in the cold. With auto-enrolment being rolled out to all employees in the UK, the gap between employee and self-employed savings will continue to grow.

“Unless this is addressed, we risk creating a ticking pensions time bomb for the self-employed.”

FSB has established a workplace pension product available to its members, which is specifically designed to help small business owners meet their auto-enrolment duties.

Members also receive expert guidance to help them get to grips with the legislation and what it means for their business, free access to company pension scheme administration software, online support to help manage every aspect of compliance, a dedicated phone helpline, and flexible transfer and consolidation options for both themselves and their employees.